A Tip From Uncle Sam

Legislative Apocalypse

Andrew MellonWas a
Piker

August 2002
Reader's Digest

March 2003
Family Circle

April 2003
The Elks Magazine

Perhaps you're a conservative saver more interested in security than in trying to harness those big but slippery gains possible in the equities markets. Or maybe you're simply looking for ways to diversify a portfolio too heavily weighted in stocks to allow for restful nights in these volatile economic times.

If either of these descriptions sounds like you, listen up.

You need to know about a new kind of U.S. Treasury bond called Treasury inflation-protected securities (TIPS). They were designed by Uncle Sam to offer investors an inflation-proof way to diversify their portfolios. You need to know about them because some opponents are saying they are too good a deal for investors. They say the government has been losing money on them. I don't know about you, but that kind of argument is just what it takes to perk up my interest.

"For the long-term investor, these are the closest thing to a risk-free asset," said William Lloyd, director of research at Barclays Capital, a leading dealer of the bonds. "With TIPS, the Treasury is attracting people who may have never bought Treasuries before. By expanding the market in the long run they actually lower the overall cost of funding for the government."

A Treasury advisory committee actually recommended in May that sales of the bonds stop. The panel is made up of representatives of 20 bond dealers and institutional investors, including Goldman Sachs, Merrill Lynch, and Salomon Smith Barney.

That kind of world-class opposition makes these securities mighty tempting as far as I'm concerned.

TIPS were introduced in 1997 under Treasury Secretary Robert E. Rubin. They were conceived as a vehicle that would help to protect investors' purchasing power. The bonds are structured to provide a base rate of return, plus an additional amount roughly equal to the inflation rate.

As of the most recent Treasury auction, TIPS provided a base return of 3.5 percent for a 10-year issue maturing in January 2011. In addition, the principal is adjusted periodically to reflect changes in the Consumer Price Index; when inflation rises, the principal rises with it. Interest is paid twice a year, based on the adjusted principal.

Unlike TIPS, traditional Treasury issues are not guaranteed to keep up with inflation. A traditional 10-year Treasury bought for $10,000 is cashed in at maturity for $10,000; it pays interest twice a year. A 10-year note maturing in February 2011 yielded 5.28 percent recently.

If you think you might be interested in TIPS, the important question to consider is whether inflation will rise enough to make up for the difference between the base return of TIPS and the yield on traditional Treasuries. This difference, or implied inflation rate, was 1.78 percent recently. If inflation over the life of the bond is less than 1.78 percent, on average, then the regular Treasury bond will turn out to be a better deal. If, on the other hand, inflation is higher than 1.78 percent, TIPS will be the better option.

Personally, I don't see inflation at less than 1.78 percent any time in the near future, so TIPS look like a very good deal to me.

Another type of Treasury, Series I savings bonds, are also adjusted for inflation. They tend to have slightly lower rates than TIPS bonds but they grow tax-deferred, a very important consideration for some investors. Some analysts consider Series I savings bonds even more attractive for small investors than TIPS. From my perspective, though, TIPS are the better deal.

TIPS are issued three times a year and you can buy them directly from the Treasury in denominations starting at $1,000. If you miss the sale scheduled for October, your next chance will be in January. You can also buy or sell TIPS at any time for a fee through your broker.

There are also mutual funds dealing in Treasuries. I like mutual funds for individual investors, especially those with less than $10,000 to invest. Mutual funds put together portfolios of varying maturities, providing a degree of diversification that would be difficult if not impossible for the typical investor to attain.

Vanguard Inflation-Protected Securities, for example, was started in June 2000. It has quickly grown to $360 million in assets. Pimco Real Return Bond has taken in $500 million in the last six months and now has more than $1.2 billion in assets.

Getting back to TIPS. Opponents of the bonds insist they are a bad deal for the federal government. According to the May report of the advisory committee, the government paid $1.5 billion more in coupon payments since the inception of the TIPS program than it would have with traditional bonds. In recent years, the Treasury has cut back on bond sales, and the advisory panel contends that TIPS should be next on the chopping block. They now represent about 8 percent of Treasury notes and bonds.

Experts who favor TIPS say many dealers oppose the bonds because they are intended for the buy-and-hold investor, not for traders. That may well be true since dealers make their money from volume and TIPS don't turn over very much.

I don't know how you feel about all this, but what it says to me is that it's time to grab some TIPS before the axe falls.

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Many years ago, one of the popular national magazines carried a regular feature highlighting what they called "Silly Law of the Month." The object of this satirical indignation was obsolete or irrelevant legislation remaining on the books in one state or another.

I still recall several examples from that feature. One was a law requiring the operator of a gasoline or steam-powered motor vehicle to turn off his engine if it appeared to be frightening a horse. Another imposed a fine on anyone caught playing poker or other game of chance on the Sabbath.

At the time -- fifty or more years ago -- the notion of silly laws, or too many laws, rated little more than a passing chuckle.

Not so today.

Somewhere in the course of America's checkered legislative history it became our custom to measure the worth of our state and federal legislators on the basis of how many new laws they manage to inject into the legislative hopper.

That has turned out to be an extraordinarily bad idea.

Sadly, the most pressing challenge facing many of our state and federal legislators today is the fierce competition with each other to get their names on new laws. The inevitable result has been countless days, months, and years of legislative time, and undreamed of amounts of taxpayer dollars, spent in trying to concoct ideas for hot new laws. The resulting backroom deals would be comic if they weren't so frightful: "If you'll let me put your name down as co-sponsor of my new bill, I'll cosponsor your next new bill."

As it is, we already have too many silly laws on America's books -- hundreds of thousands of them. Still, new ones keep gushing out of the legislative geyser, much like an apocalyptic flood.

The commonwealth of Pennsylvania stands as one of the finest examples of this phenomenon. In the 1995/96 legislative session alone, Pennsylvania legislators introduced a total of 4,772 new bills. Remember, that's for a single two-year legislative session.

Even more dismaying is what takes place in the hallowed chambers of the United States Capitol building in Washington during a typical session. In the 1995/96 session, the combined total of new bills introduced by both houses of congress was a mind-numbing 7,991.

Fortunately, the majority of new bills introduced by our overzealous lawmakers are so blatantly nonsensical or self- serving that they never get beyond committee level. Only 333 of those federal bills were actually passed into law during 1995/96.

Of the 4,772 new bills introduced in Pennsylvania during that same period, 317 were eventually written into law. You will note that the single state of Pennsylvania passed almost as many new laws during this period as did the U.S. Congress. And let's not forget the other 49 states.

Although the survival rate for new bills is comfortingly low, it doesn't take a math wizard to figure out that the number of new laws actually put into place in this country in a decade or two is truly mind boggling.

Just how compelling is this need to feed increasing amounts of fodder into the legislative grist mill? Consider what happened in the Pennsylvania House at the start of the 1997/98 session. A newly-elected state representative from Montgomery County, with no prior legislative experience, introduced her first proposed legislation before she had been in office 90 days -- barely enough time to learn where the coffee shop is. And what was her first contribution to the legislative cauldron? A bill that would require all restaurants in the state to install diaper-changing tables in both women's AND men's rest rooms.

A more telling illustration, perhaps, is the rush of state legislators to introduce bills authorizing new designs for auto license plates. A number of states have authorized dazzling assortments of designs and colors that have rendered license plates far less useful as an on-the-spot means of visual identification. Law enforcement agencies trying to identify a registration with only a partial license number to work with have a difficult enough time when the state is known; the task becomes all but impossible if the state of registration is uncertain.

Some special-interest license plates have designs and colors that make it difficult to read, or even see, their numbers from a reasonable distance. Referring to Pennsylvania's "Flagship Niagara" design, a New York collector of license plates said, "The cops hate it. Sure, it's very pretty, but they just can't read it." At last count, Pennsylvania alone has a nonsensical 118 different plate designs and color combinations, and there are other states with even more. Despite earnest pleas by law enforcement agencies to cool it, the flood shows no sign of abating.

Personally, I believe the time has come for us to put a halt to this madness. I say we should shower recognition, adoration and star status on those legislators who dedicate themselves to erasing from the books as many as possible of those silly, intrusive and costly laws that have been suffered upon us all these years. In other words, lets reward with our votes those legislators who work to stem the apocalyptic flood instead of those who take great delight in fortifying it.

Come to think of it, that would be a great election platform for someone in this year's eager crop of legislative candidates.

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War has two faces. Soldiers in the trenches see one face; generals in the war room see quite another. It's that way in the world of consumers, too.

When the CoreStates/First Union Bank merger was being negotiated, the perspective was solely that of the "generals." Talk was of increased profits, economies of scale, greater efficiency. Now that the dust has settled, soldiers in the trenches (consumers) are getting their first close-up look at the newly-created "monster." What they are seeing is ugly, but was easily predictable: higher fees, longer lines, poorer service, a less caring bureaucracy. Glossy brochures and expensive TV commercials trumpet the advantages of doing business with the newly-married couple. The reality is less attractive.

The new First Union (with home offices in faraway Charlotte, NC) is a financial powerhouse of almost unimaginable proportion. With $229 billion in assets, 16 million customers, 3,400 ATM machines and 2,400 branches stretching from Florida to Connecticut, First Union is now the largest bank on the East Coast and one of the sixth largest banks in the country.

But First Union was just a teaser.

More stunning was the recently approved marriage between CitiCorp and Travelers' Group. The new CitiGroup, with 100 million customers worldwide, will have assets of $700 billion. For a while at least, that makes it the largest financial services company on the planet. To put that incomprehensible figure in perspective, it is larger than the gross domestic products of Taiwan, Bolivia, Bulgaria and Denmark combined.

Now comes the proposed merger between Bankers Trust and Germany's Deutsche Bank. If this one goes through, the new company will have assets of $9.7 billion.

Figures like these make Andrew Mellon seem like a piker.

The winner-takes-all philosophy rampant in board rooms today leaves little doubt about where the banking industry is heading. Unless their strategy is thwarted, we are destined to end up with perhaps three or four megabanks wielding an economic sledgehammer unfelt in this country, or in the world, since the days of oil baron John D. Rockefeller.

Early in this century, America woke up one morning to find that Rockefeller's corporations controlled 90% of the world's kerosene market. This was in the day when our living rooms, stores, and factories were lighted with kerosene. When Rockefeller's Standard Oil raised prices, consumers had no place else to go.

That's precisely the situation that the Sherman Antitrust Act of 1890 was designed to avoid. The basic tenet of this law is that competition helps to keep consumer prices down and quality up.

When the CoreStates/First Union merger was proposed, red flags were raised along the eastern seaboard. Among the more visible of concerned citizens was U.S. Senator Arlen Specter (R- PA). "We're seeing a real epidemic of mergers," he said. "I'm skeptical about the public interest being served." Later, he said he was considering writing legislation to restrict bank mergers.
Senator Specter has good reason to be skeptical. As more and more of the nation's finances get funneled through fewer and fewer banking houses, the consolidation of economic and political power becomes more forbidding. It doesn't take much imagination to visualize the inevitable effect of all this on individual consumers.

Unfortunately, the current environment allows for little hope that the rising flood of bank mergers will abate on its own. Even if Senator Specter and his congressional colleagues take those first steps toward restrictive legislation, meaningful results could be many years in the future. Powerful banking interests already in existence have enough muscle to delay the legislative process for years, perhaps decades. In the meantime, we can expect to see steady increases in our banking costs even as services deteriorate.

Unless you and I decide to deploy our most powerful weapon: the right to choose.
The mightiest economic force in our free marketplace is the collective will of the consumer. It cannot be denied, even by the brawniest of corporate behemoths.

Unfortunately, most American consumers have yet to recognize, much less act on, their collective economic strength.
The only certain way for us to retain the small bank amenities that we have come to enjoy is to support our remaining neighborhood banks. With federal insurance applied equally to all participating banks regardless of size, safety of our deposits is not a concern.

By seeking out the bank that provides the services we want at costs that we feel are reasonable, we set our own banking destiny. The only alternative is continued submission to the merger mania of the "generals." That, you can be assured, will guarantee the disappearance of your friendly neighborhood bank, and a continued escalation of our banking costs.

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